Controlling inflation: how and at what cost?

We no doubt have the instruments to control inflation. It is still necessary to know what is the price to pay, according to the policies used, to achieve this. To answer this, let us first recall that inflation is defined as a sustained rise in the general level of prices. That is to say that it sets in when a race develops (a one-upmanship) between prices and wages, and therefore when a “distribution conflict” is triggered.

Thus, restrictive short-term policies, by more or less reducing the market power of some of the agents, are supposed to curb inflationary dynamics. This is in particular what can be expected from monetary policy measures. Noting however that, in the current situation, considering that the neutral interest rate (the real long-term equilibrium rate) is around 1 to 2%, and starting from an inflation rate 6%, the central bank would have to raise nominal long rates to more than 7%. It is easy to imagine that such a movement will lead to a significant contraction in activity, but also risky disturbances in asset prices.